The Ukraine war continues to be a disaster in every way imaginable and the bloodshed doesn’t look like it’s going to end any time soon.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Today marks the end of the fourth year of the Ukraine-Russia war. After four years, Russia’s invasion of Ukraine has caused staggering damage to Ukraine’s people and economy. There are wildly varying estimates of those killed or wounded in the war, as well as civilian casualties. On the Ukraine and Western side, it is claimed that over 1m Russians have died, but less than 100,000 Ukrainians. The Russians claim the opposite ratio, with around 300,00 Ukrainians killed or wounded in 2025 alone. The latest estimate of Mediazona, a Ukraine based agency, is in between; with Russia at 160k killed and slightly more Ukrainians.
Whatever the truth, the war has been a humanitarian crisis for Ukraine, especially during this winter with energy and heating power systems in the major cities mostly destroyed by Russian missiles. In four years of war, millions have fled abroad and many more millions have been displaced from their homes within Ukraine. Ukraine’s population has fallen by 37% since the collapse of the Soviet Union and by 20% since the start of the war. Real GDP is down 37% since 1991 and down 21% since the start of the war.
The physical and mental damage to those staying in Ukraine has been immense. Learning losses by Ukrainian children are a particular worry. Studies show that a war during a person’s first five years of life is associated with about a 10% decline in mental health scores when they are in their 60s and 70s. So it’s not just war casualties and the economy that’s the problem, but also the long-term damage to those Ukrainians staying.
Despite the war, there has been some economic recovery in Ukraine in the last couple of years – at least in GDP terms. Ukraine’s ports on the Black Sea are still functioning and trade is flowing west along the Danube, but to a lesser extent by train. Meanwhile, agriculture has staged a modest recovery. Even so, manufacturing of iron and steel still remains at a fraction of its prewar level; down from 1.5m tonnes a month before the war to just 0.6m a month. Industrial production in Ukraine decreased 3.5% yoy at the end of 2025.
Ukraine increasingly lacks able-bodied people to produce or to go to war. Independent analyses reveal a volatile yet consistently elevated unemployment rate, peaking at 22.8% in late 2025. Over 80% of these are women, as the men have mainly been drafted into the armed forces. And half of all young people (under 35 years) not yet drafted are not working. There is a massive shortage of skilled people, who have mostly left the country. So desperate is the government for men to join the army that it has resorted to ‘press gangs’ that roam the streets day and night to snatch people to force them to the front line.
Ukraine is still totally dependent on support from the West. It needs at least $40bn a year in order to sustain government services, support its population and maintain production. On top of that, it needs another $40bn a year to support the armed forces. Since the beginning of Russia’s full-scale invasion, over half of the state budget has been spent on defence, or 26% of GDP. It has been relying on the EU for civil funding, while relying on the US for all its military funding – a straight ‘division of labour’. But since the Trump administration took office in 2025, the US has drastically reduced its direct military aid and instead urged the Europeans to take up the baton, both for civil and military funding.
In 2025, European aid increased notably, with military aid allocation rising by 67% and financial and humanitarian aid by 59%. The share of total civil aid from the EU rose to 90% from around 50% at the start of the war. But because of the withdrawal of the US, military aid in 2025 was still down 13% overall and civil funding fell 5%, in real terms.
Europe’s military aid depends on just a few countries in Western Europe, primarily Germany and the UK, which accounted for around two-thirds of Western Europe’s military aid between 2022 and 2025. The EU is now stuck on trying to find funds for Ukraine this year. Its plan to use frozen Russian FX assets fell apart because the holders of those assets, Euroclear in Belgium, feared heavy losses in international courts. A new EU plan to provide around $100bn through sovereign bond issuance is still in abeyance.
The IMF and World Bank have offered monetary assistance but, in this case, Ukraine has to show it has ‘sustainability’, ie it is able at some point to pay back any loans. So if bilateral loans from the US and EU countries (and it is mainly loans, not outright aid) do not materialise, then the IMF cannot extend its lending programme. A new loan instalment of about $8bn is about to be announced by the IMF for 2026.
All this brings us back to what will happen to Ukraine’s economy, if and when the war with Russia comes to an end. The very latest estimate from the World Bank puts reconstruction costs at $588bn over the next ten years for Ukraine to recover and rebuild – assuming the war ends this year. That’s three times its current GDP. However, even that may well be an underestimate. Ukraine itself estimates that $1trn will be needed, with nearly $400 billion for energy-sector rehabilitation, $300 billion for housing and urban infrastructure, $200 billion for transport corridors and logistics, and $100 billion for social services and public institutions. This total is equivalent to six years of Ukraine’s previous annual GDP. That’s about 2.0% of EU GDP per year or 1.5% of G7 GDP for five years. Even if reconstruction goes well and assuming that all the resources of pre-war Ukraine are restored (eastern Ukraine’s industry and minerals are now in the hands of Russia), then the economy (GDP) would still be 15% below its pre-war level. If not, recovery will be even longer.
The EU Commission has announced a European Flagship Fund, supposedly a joint ‘equity vehicle’ backed by the EU, Italy, Germany, France, Poland and the European Investment Bank to mobilize large-scale public and private investments for Ukraine’s post-war reconstruction. In effect, this would mean the takeover of Ukraine’s economy and resources by Western investors. As it is, much of what is left of Ukraine’s resources (those not annexed by Russia) has already been sold off to Western companies. Overall, 28% of Ukraine’s arable land is now owned by a mixture of Ukrainian oligarchs, European and North American corporations, as well as the sovereign wealth fund of Saudi Arabia. Nestle has invested $46 million in a new facility in western Volyn region while German drugs-to-pesticides giant Bayer plans to invest 60 million euros in corn seed production in central Zhytomyr region. MHP, Ukraine’s biggest poultry company, is owned by a former adviser to Ukrainian president Poroshenko. MHP has received more than one-fifth of all the lending from the European Bank for Reconstruction and Development (EBRD) in the past few years. MHP employs 28,000 people and controls about 360,000 hectares of land in Ukraine — an area bigger than EU member, Luxembourg.
The Ukrainian government is committed to a ‘free market’ solution for the post-war economy that would include further rounds of labour-market deregulation below even EU minimum labour standards i.e sweat shop conditions; and cuts in corporate and income taxes to the bone; along with full privatisation of remaining state assets. However, the pressures of a war economy have forced the government to put these policies on the back burner for now, with military demands dominating.
The aim of the Ukraine government, the EU, the US government, the multilateral agencies and the American financial institutions now in charge of raising funds and allocating them for reconstruction is to restore the Ukrainian economy as a form of special economic zone, with public money to cover any potential losses for private capital. Ukraine will be made free of trade unions, any severe business tax regimes and regulations and any other major obstacles to profitable investments by Western capital in alliance with former Ukrainian oligarchs.
Russia: the war economy
What about Russia? For a while, Russia’s invasion of Ukraine in early 2022 to take over the four Russian-speaking provinces in the Donbass in eastern Ukraine ironically gave a boost to the economy. Russia managed to steer through Western sanctions, while investing nearly a third of its budget in defence spending. Despite being cut off from energy markets in Europe, it was able to diversify to China and India, in part by using a ‘shadow’ fleet of tankers (ie uninsured by the West) to skirt the price cap that Western countries had hoped would reduce the country’s war chest. China now takes 45% of all Russian oil exports and Russia has become China’s top oil supplier.
Chinese imports into Russia have jumped more than 60% since the start of the war and rose 26% in 2025, as China has supplied Russia with a steady stream of goods including cars and electronic devices, filling the gap of lost Western goods imports.
However, the war has intensified an acute labour shortage inside Russia. Like Ukraine, Russia is now desperately short of people – if for different reasons. Even before the war, Russia’s workforce was shrinking due to natural demographic causes. Then at the start of the war in 2022, about three-quarters of a million Russian and foreign workers, the middle class in IT, finance, and management, left the country. Meanwhile, the Russian army has to recruit between 10,000 and 30,000 every month, sucking up the labour force from domestic production. To boost the armed forces, Russia has recruited convicts and others on contracts. The initial boost to the economy and wages from huge defence spending has begun to wane. And global oil prices have fallen well below the break-even level for Russian oil revenues.
Russia’s oil and gas income, representing up to 50% of state revenues, is down 27% year-on-year. Inflation is around 8%, down from double-digit highs, but the Russian central bank is still keeping interest rates at 16%, making it impossible for households and businesses to borrow to invest or buy large ticket items. War spending is now over 7% of annual GDP. Despite increased taxation, the sharply rising budget deficit to pay for the war is draining Russia’s sovereign wealth fund and forcing the monetary authorities to consider monetising the deficits.
However, Russia still has large foreign exchange reserves and a low public debt ratio to GDP. Even if export revenues slump, the largely state-owned banking system is sitting on piles of cash that could be used and banks could also be directed to buy government bonds, as they were at the end of 2024. If all else fails, the central bank could buy government bonds, thus monetising the debt, although that would lead to a sharp depreciation of the ruble. and so drive up inflation.
Russia’s economy has entered 2026 weaker than it was a year before, with growth declining and oil prices well below budgeted projections.
Services and manufacturing activity indexes (PMIs) have dropped sharply and are now in contractionary territory. Full year real GDP growth estimates have been revised down to less than 1% for 2025. The Economic Forecasting Institute of the Russian Academy of Sciences projects growth of 0.7% in 2025 and 1.4% in 2026, accelerating to about 2% in 2027. The International Monetary Fund forecasts growth of 0.6% in 2025 and 1.0% in 2026.
In effect, the Russian economy, like many others in the OECD, is in “stagflation” (where price inflation stays high, but output stagnates). Russia’s ‘military Keynesianism’ is no longer delivering, as before. As a result, any opposition to the war is being ruthlessly suppressed. The most famous antiwar dissident is the Marxist Boris Kagarlitsky, arrested in July 2023 and now serving five years in a prison colony. But there are others. In November 2025, members of a small Marxist study circle in the city of Ufa were sentenced to 24 years, accused of “terrorism” and “conspiracy to overthrow the government” for reading works of Marx.
However, despite these pressures on the Russian economy and increasing austerity for the Russian people, there will be no financial collapse as many Western commentators claim. This wishful thinking has been on the agenda of many ‘experts’ in the West for all of the four years of war. But the Russian economy has survived and has every prospect of being sufficiently strong to continue the war through 2026 and beyond. Unlike Ukraine, more borrowing is possible because Russia has a relatively low stock of debt and taxes can be raised again. The central bank can print money and the government can continue to nationalise businesses to strengthen the war economy.
It will be a different matter if and when the war ends. War production is basically unproductive for capital accumulation over the long run. Russia’s economy will revert to civilian capital accumulation when the war ends. Then Russia’s productive sectors will be exposed. A post-war slump is very likely. The Russian economy remains fundamentally natural resource-linked. It relies on extraction rather than manufacturing. Russia remains technologically backward and dependent on high-tech imports. Russia is not a substantial player in any of the cutting-edge technologies, from artificial intelligence to biotechnology. It has yet to produce technologies fit for a competitive export market beyond arms and nuclear energy, with the former already sanctioned and the latter on the brink of being so.
The demographic trough, the declining quality of university education, severed ties with international schools and a brain drain exacerbate these problems. The technological gap will likely widen, with Russia increasingly relying on Chinese imports and reverse engineering (copying). Russia’s potential real GDP growth is probably no more than 1.5% a year as growth is restricted by an ageing and shrinking population and low investment and productivity rates. The underlying message is that Russia will remain feeble economically for the rest of this decade.
What about peace?
In my view, there is little prospect of any peace deal in the foreseeable future. When taking office this time last year, President Trump declared that he would settle the war in Ukraine within a week. Now in 2026, interminable negotiations continue with no sign of any deal. The current Ukraine leadership is opposing any deal that means the loss of any territory (including Crimea) and any veto on future membership of NATO. European leaders have declared that they will back Ukraine and continue to finance the war and provide military support. The Russians refuse to make any concessions on their long stated position that the Donbass and Crimea are now part of Russia, that Russian-speakers within Ukraine are to be protected from repression and discrimination, that Ukraine must renounce joining NATO and its armed forces must be reduced to defensive levels only. In turn, the Europeans threaten to send troops on the ground to Ukraine to back a supposed ‘ceasefire’.
This is an impasse in the style of the Korean war of the 1950s (which officially is still not ended!). The war looks likely to be settled on the front, rather than by diplomacy. So it will continue with more thousands of soldiers as casualties, deprivations for Ukrainians and worsening living standards for most Russians.
The war has not only destroyed Ukraine; it has seriously weakened the European economy, as the costs of production have rocketed with the loss of cheap energy imports from Russia. For example, the UK now has the highest electricity and energy costs in the world (with Germany not far behind)! A recent survey by the British employers federation (CBI) found that the UK has industrial prices nearly two-thirds above the median of International Energy Agency (IEA) countries and the highest among G7 members. UK electricity prices are around double the EU median. The average UK business currently faces electricity costs that are around 70% higher than pre-crisis, while their gas costs are over 60% higher. Four in ten firms have also indicated they plan to scale back investment as a consequence.
But it seems that the European leaders want to continue the war even if Trump eventually pulls out. They claim that if Ukraine is supported for a while longer, Russian losses will be too great, the Russian economy will collapse and Putin will have to sue for peace, and then possibly be ousted. The Russians think the opposite; that Ukraine is on its knees and cannot hold out much longer.
The Europeans reckon Russia is weak and near defeat – yet at the same time will invade Europe once it has defeated Ukraine – a contradictory analysis indeed. But this argument is justifying a massive doubling of defence spending towards 5% of the GDPs of the major European economies within the next ten years, so they can ‘defend’ themselves from the impending Russian invasion. This is ludicrously justified on the grounds that spending on ‘defence’ “is the greatest public benefit of all” according to Bronwen Maddox (promoting the view of the British security services). She concluded that: “the UK may have to borrow more to pay for the defence spending it so urgently needs. In the next year and beyond, politicians will have to brace themselves to reclaim money through cuts to sickness benefits, pensions and healthcare…In the end, politicians will have to persuade voters to surrender some of their benefits to pay for defence.”
This will mean a huge diversion of investment away from badly needed public services and benefits and technological investment and instead into unproductive and destructive arms production. That puts a huge uncertainty about Europe’s future as a leading economic entity through the rest of this decade and beyond.
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